Are NC tax cuts a race to the bottom?

In July 2013, Gov. Pat McCrory signed a controversial tax reform law. In praising the law, he said, “This tax reform package puts more money in families’ budgets and will restore confidence for North Carolina businesses. Because of this package, job creators will think about relocating to our great state.”

I totally agree that putting more money in families’ budgets provides a great boost to the economy. A good example is lower gasoline prices that have certainly given consumers more cash to spend recently. And consumer spending is around 70 percent of the U.S. economy, driven mainly by the 80 percent of consumers who are not very wealthy.

But the 2013 N.C. tax reform provided the overwhelming benefits to higher-income taxpayers and increased sales taxes on consumers. A family with a taxable income of $50,000, which is above the median income, received a tax cut of $388. A family with a taxable income of $200,000 received a tax cut of $2,938.

That amounts to over 7½ times more tax cut benefit on only four times the taxable income. So while families with higher taxable incomes benefited significantly, the vast majority of taxpayers who have much lower taxable incomes received a very small cut in their income taxes.

All consumers will pay more sales taxes, but who ends up paying most of the sales taxes? You guessed it — those with taxable incomes below $50,000. I wonder, did this tax reform really put more money in most families’ budgets?

The initial effects of the 2013 tax reform appeared in fiscal year 2014 that ended June 30. The General Assembly’s Fiscal Research Division (FRD) reported that North Carolina general fund revenues for FY 2014 were $450.3 million below the $20.6 billion budgeted amount. This shortfall put the focus on FY 2015.

In its January 2015 “Quarterly General Fund Revenue Report,” for the second quarter of FY 2015, the FRD reported that general fund revenues were $199.2 million below the consensus revenue target for Dec. 31, 2014. This shortfall was mainly due to wage and salary income tax collections that were below forecast expectations. Higher than forecast sales tax collections kept the shortfall from being much greater.

The FRD cited slower than expected wage and salary growth as a key factor affecting revenue shortfalls. As we know from numerous articles and reports, the wealthy are getting much wealthier while the middle class and below are not making much financial progress.

In fact, an August 2014 report by the Standard and Poor’s Research Service, titled “Income Inequality Weighs on State Tax Revenues,” was right on point. It concluded that when the vast majority of taxpayers are not progressing economically, the economy suffers — and so do state tax revenues.

Revenue shortfalls cause huge budgeting problems. And the FRD has already raised the warning flags for FY 2015 and beyond, citing the uncertainty of the “full fiscal implications” of the 2013 tax reform, “which exceeded $1.5 billion per year.” They are highly focused on collections for April 2015.

The FRD “revenue outlook” for the second half of FY 2015 states, “If this April meets our expectations, we do not expect the current shortfall to grow significantly, but the slower than expected wage growth will still contribute to collections not meeting the budget target.” To me, this statement means that the FRD is already anticipating a revenue shortfall this fiscal year. It is just a question of how much.

Members of the General Assembly reconvened for the long session on Jan. 14. One of their tasks will be to work on a budget for FY 2016 through FY 2017. They will be struggling to fund much-needed infrastructure projects and an underfunded court system. And remember, the N.C. individual income tax rate went down to 5.75 percent and the corporate rate dropped from 6 percent to 5 percent starting in January.

So what will the legislators do if there is another large revenue shortfall for FY 2015? Will they raise gasoline and sales taxes? And if revenues are projected to be lower going forward, will they cut public education funding for FY 2016? The FY 2015 budget is already $702 million less than necessary just to keep up with inflation since the FY 2008 budget.

I believe the children of North Carolina are the state’s most precious assets. Well-educated children become more productive adult contributors to the economy both because they can command higher wages and because they attract businesses that need a well-trained workforce.

The Economic Policy Institute published a study in August 2013 titled “A Well-Educated Workforce Is Key to State Prosperity.” One of the many conclusions of this study was: “Cutting taxes to capture private investment from other states is a race-to-the-bottom state economic development strategy that undermines the ability to invest in education.”

Is North Carolina racing to the bottom with the 2013 tax reform? I believe it is. And will Gov. McCrory’s “job creators” want to relocate to a state with a substandard public education system? I don’t think so.

It's Getting Worse

North Carolina’s public schools are in a crisis. Teachers are leaving our classrooms in record numbers due to low pay and poor working conditions. Years of neglect have left our schools overcrowded and underfunded. It’s time to stop cutting and start investing in our public schools.